R  EPORTABLE  

  IN THE SUPREME COURT OF INDIA  CIVIL APPELLATE JURISDICTION

                        CIVIL APPEAL NOs. 6949-6950 OF 2004

The Commissioner                              …..Appellant(s)

    Versus

Mahindra and Mahindra Ltd. thrg. M.D.        …..Respondent(s)

WITH  

CIVIL APPEAL No. 5320 OF 2012  CIVIL APPEAL No. 5319 OF 2012 CIVIL APPEAL No. 4435 OF 2018  

(Arising out of Special Leave Petition (C) No.  20625 OF 2012)

CIVIL APPEAL No. 890 OF 2012 CIVIL APPEAL No. 10169 OF 2010 CIVIL APPEAL No. 10168 OF 2010 CIVIL APPEAL No.  3624 OF 2012 CIVIL APPEAL No. 5751 OF 2011 CIVIL APPEAL No. 1214 OF 2012 CIVIL APPEAL No. 780 OF 2012 CIVIL APPEAL No.  2164 OF 2012

CIVIL APPEAL No. 4434 OF 2018  (Arising out of Special Leave Petition (C) No.  

20144 OF 2012)

CIVIL APPEAL No. 7951 OF 2012

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CIVIL APPEAL No. 4442 OF 2018  (Arising out of Special Leave Petition (C) No.  

4008 OF 2014)

CIVIL APPEAL No. 4441 OF 2018  (Arising out of Special Leave Petition (C) No.  

5782 OF 2014) CIVIL APPEAL No. 4345 OF 2014

CIVIL APPEAL No. 4609 OF 2018  (Arising out of Special Leave Petition (C) No.  

18964 OF 2014)

CIVIL APPEAL No. 4436 OF 2018  (Arising out of Special Leave Petition (C) No.  

24752 OF 2014)

CIVIL APPEAL No. 4545 OF 2018  (Arising out of Special Leave Petition (C) No.  

4977 OF 2015)

CIVIL APPEAL No. 6942 OF 2015

CIVIL APPEAL No. 4539 OF 2018  (Arising out of Special Leave Petition (C) No.  

6648 OF 2016)

CIVIL APPEAL No. 4546 OF 2018  (Arising out of Special Leave Petition (C) No.  

29776 OF 2016)

    J U D G M E N T

R.K. Agrawal, J.

Civil Appeal Nos. 6949-6950 OF 2004

1) Leave granted.

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2) These appeals have been filed against the impugned judgment and

order  dated  29.01.2003  passed  by  the  High  Court  of  Judicature  at

Bombay in R.A.No.1561 (Bom)/1982 and R.A.No.5161/B/80 whereby

the  Division  Bench  of  the  High  Court  while  giving  answers  to  the

Reference Applications filed by the Respondent as well as the Revenue,

confirmed certain findings passed by the Income Tax Appellate Tribunal

(in short ‘the Tribunal’) dated 16.08.1982 in favour of the Respondent.

Along with this, there are certain other connected appeals also. Since

the question of law is same in all these appeals, all the appeals would

stand disposed off with this common judgment.

3) Brief facts:-  

(a) For the proper appreciation of the issue in the case at hand, we

deem it apposite to mention the gist of the facts. The appellant herein is

the Department of Income Tax (for brevity ‘the Revenue), on the other

hand, respondent herein is Mahindra & Mahindra Ltd. (for brevity ‘the

Respondent’) - a company registered under the Companies Act, 1956.

(b) The Respondent, way back, decided to expand its jeep product line

by  including  FC-150  and  FC-170  models.  For  this  purpose,  on

18.06.1964, it entered into an agreement with Kaiser Jeep Corporation

(for short ‘the KJC’) based in America wherein KJC agreed to sell the

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dies, welding equipments and die models to the assessee. The final price

of  the  tooling  and  other  equipments  was  agreed  at  $6,50,000/-

including cost, insurance and freight (CIF). Meanwhile, the Respondent

took  all  the  requisite  approvals  from  the  concerned  Government

Departments. The said toolings and other equipments were supplied by

the  Kaiser  Jeep  Corporation  through  its  subsidiary  Kaiser  Jeep

International Corporation (KJIC).

(c) However,  for  the  procurement  of  the  said  toolings  and  other

equipments, the KJC agreed to provide loan to the Respondent at the

rate of  6% interest repayable after 10 years in installments. For this

purpose,  the  Respondent  addressed a letter  dated 07.06.1965 to  the

Reserve Bank of India (RBI) for the approval of the said loan agreement.

The RBI and the concerned Ministry approved the said loan agreement.

(d) Later on,  it  was informed to the Respondent that  the American

Motor Corporation (AMC) had taken over the KJC and also agreed to

waive  the  principal  amount  of  loan  advanced  by  the  KJC  to  the

Respondent and to cancel the promissory notes as and when they got

matured. The same was communicated to the Respondent vide letter

dated 17.02.1976.

(e) On  30.06.1976  the  Respondent  filed  its  return  and  shown  Rs.

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57,74,064/-  as  cessation  of  its  liability  towards  the  American  Motor

Corporation. After perusal of the return, the Income Tax Officer (ITO)

concluded  that  with  the  waiver  of  the  loan  amount,  the  credit

represented income and not a liability. Accordingly, the ITO, vide order

dated 03.09.1979,  held that  the  sum of  Rs 57,74,064/- was taxable

under Section 28 of the Income Tax Act, 1961 (for brevity ‘the IT Act’).

(f) Being dissatisfied, the Respondent preferred an appeal before the

Commissioner  of  Income  Tax  (Appeals)  being  No.  CIT(A)

V/CCIV/IT/261/79-80.  After  perusal  of  the  matter,  learned  CIT

(Appeals),  vide  order  dated  23.03.1981,  dismissed  the  appeal  and

upheld the order of the ITO with certain modifications.

(g) Being aggrieved, the Respondent as well as the Revenue preferred

appeals being Nos. 2007 (Bomb.) of 1981 and 2132 of 1981 respectively

before  the  Tribunal.  The  Tribunal,  vide  order  dated  16.08.1982,  set

aside the order passed by learned CIT (Appeals) and decided the case in

favour of the Respondent.

(h) Being  aggrieved,  the  Revenue  filed  a  Reference  before  the  High

Court at Bombay. In that Reference, three applications were filed, one

by the assessee and rest two by the Revenue. Vide impugned common

judgment and order dated 29.01.2003, the High Court confirmed certain

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findings of the Tribunal in favour of the Respondent.

(i) Hence, these instant appeals have been filed by the Revenue.

4) Heard learned senior counsel for parties and perused the factual

matrix of the case.

Point(s) for consideration:-

5) The short point for consideration before this Court is whether in

the  present  facts  and  circumstances  of  the  case  the  sum  of  Rs.

57,74,064/- due by the Respondent to Kaiser Jeep Corporation which

later  on  waived  off  by  the  lender  constitute  taxable  income  of  the

Respondent or not?

Rival contentions:-

6) At the onset, learned senior counsel for the Revenue  submitted

that the Respondent had received the amount of Rs. 57,47,064/- from

the American Motor Corporation as loan waiver, which it had initially

borrowed from the Kaiser Jeep Corporation as loan in order to enable it

to purchase dies, tools etc. for manufacture of jeeps. The waiver of loan

was done by the American Motor Corporation, who took over the Kaiser

Jeep  Corporation,  as  a  measure  of  compensation  for  certain  losses

including  goodwill,  the  benefit  of  association,  and  also  for  sudden

change to the American Motor Corporation as a share holder which was

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credited by the Respondent to its account but was claimed as exemption

from taxation being capital receipt.

7) Before  concluding,  it  was  contended  that  since  an  amount  is

waived off, for which the Respondent is claiming exemption, it actually

amounts to income at the hands of the Respondent in the sense that an

amount which ought to be paid by it is now not required to be paid. As a

result, the case of the Revenue falls within the ambit of Section 28(iv)

and, alternatively within Section 41 of the IT Act. Hence, the decision of

the High Court is liable to be set aside.  

8) Conversely, learned senior counsel for the Respondent submitted

that  the  Kaiser  Jeep  International  Corporation  (KJIC)  supplied  the

toolings and the loan was given by the Kaiser Jeep Corporation (KJC),

hence,  these  transactions  were  independent  transactions.  The  only

relationship, which survived after the supply of toolings, was that of a

lender and borrower. The purchase of toolings was not a transaction for

the purchase of goods on credit in the ordinary course of business nor

could it be equated to unpaid purchase consideration to be liquidated

over a period of time.  

9) Further, it was also submitted that it is very clear that the amount

of $650,000 provided by KJC was in fact a loan on which interest was

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being paid regularly from time to time. It is also pointed out that in the

books of account of the Respondent, this loan has been shown in the

Balance  Sheet  under  the  heading  “Loans-unsecured”.  Hence,  it  is

submitted that the said sum could not be brought to tax as it represents

the waiver of a loan liability which was on the capital amount and is not

in the nature of income. Accordingly, the High Court rightly upheld the

order of the Tribunal and, hence, these appeals deserve to be dismissed.

Discussion:-

10) The term “loan” generally refers to borrowing something, especially

a sum of cash that is to be paid back along with the interest decided

mutually by the parties. In other terms, the debtor is under a liability to

pay back the principal amount along with the agreed rate of interest

within a stipulated time.  

11) It  is  a  well-settled  principle  that  creditor  or  his  successor  may

exercise their “Right of Waiver” unilaterally to absolve the debtor from

his liability to repay. After such exercise, the debtor is deemed to be

absolved from the liability of repayment of loan subject to the conditions

of waiver. The waiver may be a partly waiver i.e., waiver of part of the

principal or interest repayable, or a complete waiver of both the loan as

well as interest amounts. Hence, waiver of loan by the creditor results in

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the debtor having extra cash in his hand. It is receipt in the hands of

the  debtor/assessee.  The short  but  cogent  issue  in  the  instant  case

arises whether waiver of loan by the creditor is taxable as a perquisite

under Section 28 (iv) of the IT Act or taxable as a remission of liability

under Section 41 (1) of the IT Act.  

12) The first issue is the applicability of Section 28 (iv) of the IT Act in

the  present  case.  Before  moving  further,  we  deem  it  apposite  to

reproduce the relevant provision herein below:-

“28.  Profits  and  gains  of  business  or  profession.—The  following income shall be chargeable to income-tax under the head “Profits and gains of business profession”,-- x x x  (iv)  the  value  of  any  benefit  or  perquisite,  whether  convertible  into money or not, arising from business or the exercise of a profession; x x x”

13) On a plain reading of Section 28 (iv) of the IT Act,  prima facie,  it

appears that for the applicability of the said provision, the income which

can be taxed shall arise from the business or profession. Also, in order

to invoke the provision of Section 28 (iv) of the IT Act, the benefit which

is received has to be in some other form rather than in the shape of

money. In the present case, it is a matter of record that the amount of

Rs. 57,74,064/- is having received as cash receipt due to the waiver of

loan. Therefore, the very first condition of Section 28 (iv) of the IT Act

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which says any benefit or perquisite arising from the business shall be

in the form of benefit or perquisite other than in the shape of money, is

not  satisfied  in  the  present  case.  Hence,  in  our  view,  in  no

circumstances, it can be said that the amount of Rs 57,74,064/- can be

taxed under the provisions of Section 28 (iv) of the IT Act.

14) Another  important  issue  which arises  is  the  applicability  of  the

Section 41 (1) of the IT Act. The said provision is re-produced as under:

“41. Profits chargeable to tax.- (1) Where an allowance or deduction has been made in the assessment for any year in respect of loss, expenditure or trading liability incurred by the assessee (hereinafter referred to as the first-mentioned person) and subsequently during any previous year,- (a) the first-mentioned person has obtained, whether in cash or in any

other manner whatsoever, any amount in respect of such loss or expenditure or some benefit in respect of such trading liability by way of remission or cessation thereof, the amount obtained by such person or the value of benefit accruing to him shall be deemed to be profits  and  gains  of  business  or  profession  and  accordingly chargeable  to  income-tax  as  the  income  of  that  previous  year, whether  the  business  or  profession  in  respect  of  which  the allowance or deduction has been made is in existence in that year or not; or x x x”

15) On a perusal of the said provision, it is evident that it is a sine qua

non  that  there  should  be  an allowance  or  deduction claimed by  the

assessee in any assessment for any year in respect of loss, expenditure

or trading liability incurred by the assessee. Then, subsequently, during

any previous year,  if  the creditor remits or waives any such liability,

then the assessee is liable to pay tax under Section 41 of the IT Act. The

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objective behind this Section is simple. It is made to ensure that the

assessee  does  not  get  away  with  a  double  benefit  once  by  way  of

deduction and another by not being taxed on the benefit received by him

in the later year with reference to deduction allowed earlier in case of

remission of such liability.  It  is undisputed fact that the Respondent

had been paying  interest  at  6  % per  annum to  the  KJC as  per  the

contract  but  the  assessee  never  claimed  deduction  for  payment  of

interest under Section 36 (1) (iii)  of  the IT Act.  In the case at hand,

learned CIT (A) relied upon Section 41 (1) of the IT Act and held that the

Respondent  had  received  amortization  benefit.  Amortization  is  an

accounting term that refers to the process of allocating the cost of an

asset over a period of time, hence, it is nothing else than depreciation.

Depreciation  is  a  reduction  in  the  value  of  an  asset  over  time,  in

particular, to wear and tear. Therefore, the deduction claimed by the

Respondent in previous assessment years was due to the deprecation of

the machine and not on the interest paid by it.  

16) Moreover, the purchase effected from the Kaiser Jeep Corporation

is  in  respect  of  plant,  machinery  and  tooling  equipments  which  are

capital assets of the Respondent. It is important to note that the said

purchase amount had not been debited to the trading account or to the

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profit or loss account in any of the assessment years. Here, we deem it

proper to mention that there is difference between ‘trading liability’ and

‘other liability’. Section 41 (1) of the IT Act particularly deals with the

remission of trading liability. Whereas in the instant case, waiver of loan

amounts to cessation of liability other than trading liability. Hence, we

find  no  force  in  the  argument  of  the  Revenue  that  the  case  of  the

Respondent would fall under Section 41 (1) of the IT Act.

17) To sum up, we are not inclined to interfere with the judgment and

order passed by the High court in view of the following reasons:

(a) Section 28(iv)  of  the IT Act does not apply on the present case

since the receipts of Rs 57,74,064/- are in the nature of cash or

money.

(b) Section 41(1) of the IT Act does not apply since waiver of loan does

not amount to cessation of trading liability. It is a matter of record

that the Respondent has not claimed any deduction under Section

36  (1)  (iii)  of  the  IT  Act   qua the  payment  of  interest  in  any

previous year.

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18) In view of  above discussion,  we are of  the considered view that

these  appeals  are  devoid  of  merits  and  deserve  to  be  dismissed.

Accordingly, the appeals are dismissed. All the other connected appeals

are disposed off accordingly, leaving parties to bear their own cost.

…….....…………………………………J.                      (R.K. AGRAWAL)

…….…………….………………………J.                  (ABHAY MANOHAR SAPRE)

NEW DELHI; APRIL  24, 2018.  

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